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Wall Street Aims to Clear Low Bar For Earnings Season

With AlcoaAlcoa set to provide the unofficial kickoff to second-quarter earnings season Tuesday afternoon, Corporate America is aiming to clear another low bar.

After many companies blamed any hiccups in the last two quarters on rocky weather, analysts aren’t expecting too much out of the second quarter even with the likely rebound in U.S. growth. Forecasts are for S&P 500 earnings to rise 2.9% from the same period last year. That growth estimate has fallen since March, when expectations were for 5.5% growth, and any pickup in profit growth is likely a second-half story.

S&P Capital IQ points to a lackluster round of guidance revisions, of which an 102 were negative and a mere 13 positive. While disappointing earnings pre-announcements have recently been the norm, FactSet data show a silver lining as negative reports have steadily decreased in volume since hitting a high of 95 two quarters ago, and positive pre-announcements are on the rise for the second consecutive quarter.

Four sectors – information technology, health care, industrials and materials – are driving the trend with the largest increases in positive guidance revisions since the fourth quarter of 2013.

The consumer discretionary sector has had an increasing number of negative guidance revisions, but it is still pegged as one of the sector’s with the best growth prospects this quarter, with earnings expected to rise 9.6%. Analysts say this strong show is partially due to the recovering auto sector, which will see higher demand thanks to improved fuel efficiency and widely available consumer credit. Automakers General MotorsGeneral Motors and Ford MotorFord Motor are each due to report the morning of July 24.

Other sectors touted for solid growth this time around are energy (11.6%), materials (10.9%) and telecom (38.5%).

The telecom outlier is thanks in large part to Verizon Communications'Verizon Communications' $130 billion purchase of the rest of Verizon Wireless from VodafoneVodafone, as well as the removal of Sprint Nextel from the S&P 500. Analysts also anticipate significant capital expenditures by service providers in an attempt to support the increasing need for data through mobile phone penetration in developed markets.

The finance sector, on the heels of a 7% decline in Q1, will continue to slow the S&P 500’s earnings progress with a 0.9% slump and they can thank the Federal Reserve’s low interest rates, which pressure bank margins. According to Zacks analyst Sheraz Mian, most of the finance sector’s growth has been achieved through cost-cutting measures, so firms are banking on a rise in interest rates to release margin pressure and spur higher earnings.

Although earnings are continuing their subpar pace of growth, the market has been on a voracious climb with the DOW hitting a record 17,000 last Thursday and the S&P 500 sitting just shy of 2,000. In the first half of 2014, the S&P 500 seemed to freeze amid the icy weather, but began to thaw in spring and has already risen 8%. LPL Financial analysts say the index is on track to reach 10% in growth by the end of the year, noting that double-digit gains are common in the middle stage of an economic cycle.

Major policy decisions have had less influence on the markets this year with economic growth taking the reigns. Throughout the year, global GDP growth has improved and analysts say it will continue to drive forward at its fastest pace in a decade. Investor confidence in the sustainability of such growth is key for valuations to rise and stocks to attain their expected upside.

In a year that has seen tepid volatility, earnings season usually prompts an uptick in stock market action. Bespoke Investment Group identified 50 stocks that tend to have substantial earnings reactions, including Millenial Media, Groupon and Netflix , which have moved an average of 14% on the day of their quarterly results. Other popular volatile stocks on earning report days include Yelp, Zynga, Trulia, Pandora, Green Mountain and Priceline.com.

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